Boeing Benefited From Low Interest Rates but an Increase Wouldn’t Hurt
American Airlines Boeing 787-8 in Charleston

Low interest rates may have helped to stimulate demand for Boeing (BA) aircraft, but that doesn't mean slightly higher interest rates -- whenever they are imposed -- would negatively impact the world's largest aircraft manufacturer.

"The low rate environment has definitely contributed to stronger demand for aircraft over the last few years," said Moody's aerospace analyst Russell Solomon, in an interview. But "in our view, Boeing is not going to notice an impact from a rate hike of 25 basis points, or even the next two or three hikes of that magnitude."

A rate hike at some point from the Federal Reserve remains likely, even if Friday's lackluster U.S. jobs report pushed the date out.

For Boeing "the incremental interest expense/ financing cost { of a rate hike} is not material, particularly at what will still be historically low interest rates," Solomon said.

It is certainly true that over the last several years low interest rates have pulled forward some demand, resulting in high backlogs at both Boeing and Airbus, which have backlogs of nearly 6,000 aircraft and nearly 7,000 aircraft, respectively. In 2015, Boeing delivered 763 aircraft while Airbus delivered 634.

Solomon said low interest rates boosted demand that would have occurred as a result of the "normal course aging of aircraft/fleet replacement," as well as the impact of high oil prices on demand for more fuel-efficient new aircraft models.

However, aircraft purchases remain long-term investments, with costs generally amortized over decades. "The cost of financing is a relatively small cost," Solomon said, while "the fuel and maintenance efficiency of the new deliveries are impactful, particularly for those {deliveries} that will replace older aircraft."

While most new aircraft are purchased by airlines, aircraft lessors purchase about a third of all narrow body aircraft and a bit less than that of all widebody aircraft.

Lessors won't be impacted by higher interest rates. "Aircraft leasing is a spread game -- higher interest rates {mean} higher lease rates," Solomon said. "Experienced lessors incorporate terms in leases where the rental increases with rising interest rates."

Boeing spokesman Chaz Bickers said higher interest rates are far less important that the continuing strong demand for aircraft. Global airline passenger traffic has been growing for decades, and Boeing and Airbus have benefited immensely from being duopoly providers, with only a limited threat to their status going forward.

"Historically, interest rates have been a minor factor in airlines' purchasing decision," Bickers said. "Carriers focus instead on the total value that new Boeing airplanes deliver, which includes improved fuel efficiency, lower operating and maintenance costs, and superior passenger experience.

"This is evident in our robust backlog, which equals about seven years of production at today's rates," he said. "Given that backlog, most near to medium-term purchasing decisions have already been made. Beyond that, our current market outlook continues to forecast strong demand for new airplanes to support fleet replacement and growth.

While interest rates may not be a major concern, investors continue to harbor doubt about Boeing's short-term outlook. After shares closed Friday at $127.38, Boeing was the third worst year-to-date performer among the Dow 30 stocks, with shares down 12%. (Goldman Sachs and Nike shares have done slightly worse). 

Investor concerns are varied. One is that orders may have peaked given the long period of both low interest rates and high fuel prices, a very good combination for incenting aircraft orders. Another is the question of who will order current model Boeing 737s and 777s when new models will soon be flying?

More immediately, the KC-46 refueling tanker is five months behind schedule and the Air Force said Friday it will seek an undefined level of compensation from the company. However, Boeing CEO Dennis Muilenburg said Thursday, at an investor conference, that "we are not discovering new technical issues" with the tanker, but rather that Boeing faces a solvable problem with the refueling boom that connects the tanker to the receiving aircraft.

Wolfe Research analyst Hunter Keay said Boeing likely faces charges related to the delay, in addition to the $1.6 billion in charges already taken due to the tanker program, but he didn't reduce estimates.

Additionally, Solomon noted that Boeing faces a problem due to the failure of the Senate Banking Committee to approve a nominee to the board of the Export-Import Bank. Congress reauthorized the bank in December, but without a quorum the bank cannot provide export-credit guarantees for deals exceeding $10 million.

"Lack of a full board at Ex-Im bank poses a bigger problem for Boeing than the coming interest rate hikes, at least the first 25 basis points and probably a good bit more," Solomon said.

See TheStreet's full coverage on the Fed's upcoming interest rates decisions.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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